Zero Depreciation Car Insurance – Is It Better than A Comprehensive Policy?

The premium payable on a third-party (TP) liability cover is the minimum. Comprehensive cover’s premium is higher than TP cover because it covers both TP and OD (Own Damage) risks. Zero depreciation car insurance is an add-on cover to a comprehensive policy. Hence, a zero depreciation car insurance cover is expensive compared to a basic comprehensive policy.

If one is driving a vehicle, having a motor insurance cover is compulsory. It has been made mandatory as per the Motors Vehicles Act, 1988. It is the primary reason why people buy car insurance. Had it not been compulsory, car insurance sales would have been lower.

There is always a tendency among people to avoid car insurance. But the government has made it mandatory to have at least third-party cover. Why? It is our government’s way to ensure that the victims of road accidents are taken care of. The insurance company compensates the victim without adding the financial burden on the accused.

Zero Depreciation Car Insurance is Expensive?

Yes, zero depreciation insurance cover is expensive. The premium payable for a zero-dep cover is higher than the third-party and comprehensive covers. The reason is that the risks covered under the Zero-Dep policy are much wider.

Zero Depreciation Car Insurance - Third Party, Own Damage, Zero-Dep (3)

For example, here are the premium values for a car worth approximately Rs.20 Lakhs. I’ve considered three types of insurance covers, third party, own damage, and zero depreciation. A package zero depreciation cover has three components, third party, own damage, and an add-on in the form of zero-dep. Check the premium break-up shown below.

Zero Depreciation Car Insurance - Premium Difference between third party, own damage

To drive the vehicle on the road, a third-party cover is mandatory. So, a person can buy only this cover and fulfill the legal requirement. Buying a comprehensive cover or zero-dep cover is not mandatory. But if the car owner desires, he/she can buy additional covers.

As compared to the third-party (TP) cover, the premium of:

  • A comprehensive policy will be about 85% higher than a third-party cover. See costs shown in the above infographics.
  • A zero-dep policy will be about 20-25% higher than a comprehensive cover.

So, we can see that comprehensive and zero-dep covers are expensive. Hence, there must be justified reasons to opt for the extra cover. In this article, we’ll see who should buy zero depreciation car insurance.

The Extent of Cover

From the cost point of view, we can see that a zero depreciation car insurance policy is expensive. The cost difference is caused mainly by the extent of the risks covered by each type of policy.

There are good articles available on the internet that will elaborately explain the difference between these policies. So, I will not go into the details of explaining its scope. This article will mainly focus on the suitability of zero depreciation car insurance. It will highlight its utility for people-specific.

From the details that we’ve seen till now in this article, for sure, zero depreciation cover is not for everyone.

Zero depreciation cover is applicable only for the policyholder’s own vehicle. The cover of one’s own vehicle is provided in comprehensive cover. The comprehensive policy includes third-party and own-damage liability cover. Hence, people who are interested in buying only a third-party liability, for them, a zero-dep cover is avoidable.

Let’s understand the extent of cover provided by the three policies pictorially.

Extent of Cover - TP, OD, Comprehensive, Zero-Dep
What does the above infographic explain?
  • Third-party cover: If the policyholder (you) has this type of car insurance, then the damages done to only the third party’s vehicle (if applicable) will be covered. But why your policy should cover the damages done to the third party’s vehicle? Yes, this will happen when the policyholder (say you), was the cause of the accident, and the third-party so claims it. The damages incurred on the policyholder’s vehicle are not covered in this policy. The policyholder must pay for the damages to his/her car from their own pocket. 
  • Comprehensive cover: If the policyholder (you) has this cover, then the damage inflicted on self’s and third party’s cars (if applicable) will be covered.  But here the depreciation factor comes into play. Hence 100% cost of damage (full settlement coverage) is not payable by the insurance company. Suppose, your vehicle had an accident and its door got damaged. It needs replacement.  The cost of a new door is Rs.10,000. But the insurance will cover only the depreciated value of the door, which is Rs.8,000. In this case, your insurance company will pay only Rs.8,000, and the balance (Rs.2,000) shall be paid from your pocket.
  • Zero Depreciation cover: Theoretically, zero depreciation insurance covers everything. That is why it is also called bumper-to-bumper insurance. No cost of damage is to be borne by the policyholder upon an insurance claim. There is no depreciation applicable. Even damages to plastics, glass, etc are 100% covered. The zero depreciation insurance policy is actually a no-worry, cover-all policy. But if it is so, why everyone is not buying it?

This is what we are trying to answer in this article. Please continue reading.

Depreciation Rates

Just for your information, as the car ages, the depreciation rates applicable are shown below:

Car’ AgeDepreciation (%)
0 to 6 months5%
6 months to 1 year15%
1 year to 2 years20%
2 years to 3 years30%
3 years to 4 years40%
4 years to 5 years50%

Moreover, some vehicle parts depreciate faster than the other parts:

Car PartsDepreciation (%)
Rubber, Plastic, and Nylon Parts; Batteries50% in the 1st year.
Fibre Parts30% in the 1st year.
Wooden Parts5% in the 1st year and 10% in the 2nd year

Limitations of zero depreciation car insurance policy

One of the limitations of zero depreciation insurance that we have already discussed is the cost. The premium payable for zero depreciation cover is usually 20-25% higher than a normal comprehensive cover. 

But this is not all. There are other minor limitations of zero depreciation cover. 

  • First, Most insurance companies offer zero depreciation cover only for cars less than five years old. So if one has a car that’s more than five years old, one shall buy either a comprehensive or a third-party cover. 
  • Second, As the premium payable on zero depreciation plans is higher, sometimes it is not worth paying it. How? Suppose you are a very good car driver, lives in a non-crowded city, and prefers to drive your Maruti Alto most of the time. Which car insurance policy is better suited here? Comprehensive. Why? Because the occurrence of accidents is less. Moreover, the cost of parts of Alto is anyways inexpensive. Hence if a person is driving a low-cost car, zero depreciation cover may not be necessary. 

But if one is driving an expensive premium car, like a BMW, zero depreciation insurance will be a value for money. Why? Because the maintenance costs of these cars are very expensive. 

  • Third, As a zero depreciation plan covers 100% cost of damage, it may lead to reckless driving. It may also lead to frequent insurance claims by the policyholder for even minor repairs. Hence to prevent any such claims, insurance companies have kept a limit on the number of claims that can be filed in a year, in case of zero depreciation policies. Only two claims per year. In the case of normal comprehensive policies, one can file any number of claims in a year. Suggested Reading: When to avoid claiming car insurance cover.
  • Forth, Zero depreciation insurance cover is provided only for private cars. Taxis and commercial vehicles like trucks & buses are not provided with zero depreciation covers.

If you fall in any of the above category highlighted above four limitations, for you zero-dep car insurance becomes avoidable.

Comparison: Comprehensive Vs Zero Depreciation Plan

ParametersComprehensiveZero Depreciation
NatureA standalone policyAn add-on cover to the comprehensive policy
Risk CoverIt offers cover for third-party liability and own damage cover. The own damage cover can be of these types: accidents, fire, transit, etc. It also provides protection against theft or damages beyond repair. It is a comprehensive policy plus cover against depreciation.
Repair CostsOnly a portion of the entire claim is settled (like 70%)The Entire claim is settled.
PremiumHigher than third-party liability (TP), but lower than zero-depHigher than TP and comprehensive policies
Age of VehicleAll vehicles irrespective of their age can be covered under this policyVehicles older than 5 years are not covered.
No. of Claims in a YearUnlimitedOnly Two

Conclusion…

Let’s try to see a zero depreciation car insurance policy from a car buyer’s perspective only. Suppose you have bought a new car Hyundai Creta 2022 model. Along with this car, you have bought a standard comprehensive car insurance policy. If everything goes normally, probably you will file for an insurance claim once every 1.5 years. For this type of car, the average cost of damage due to minor road mishaps can range from Rs.30,000 to Rs.40,000. 

The cost bifurcation between you and the insurance company will be generally 25%-75% respectively. Hence, your out-of-pocket expense will be Rs.7,500 to Rs.10,000. How do these values sound to you? If it is high, better go for a zero depreciation cover. 

Anyways, the premium of such a plan will be high but will give you a piece of mind. How? In the back of your mind, you are sure that, any type of damage is fully covered by your insurance plan. Our mind handles known costs (Premium) better than unplanned costs (like forced expenses post accidents). 

There is one more side to look at…

Till the repair costs are only due to minor accidents, zero depreciation insurance plans look compromisable. But in case of major accidents, the cost of car repair can go very high. In such cases, out-of-pocket expenses for the policyholder will be very high.  In such examples, zero depreciation policies come as a huge savior. 

For people who self-drive cars in metro/big cities like Delhi NCR, Mumbai, Kolkata, Chennai, Bangalore, etc, the risk of minor damage to cars is high. Zero Depreciation car insurance might prove more economical for them.

MANI

MANI

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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